U.S. Economy Grows at 3.8% as Consumer Spending and AI Investments Drive Expansion

The U.S. economy expanded at an annualized rate of 3.8% in the second quarter of 2025, according to the Bureau of Economic Analysis (BEA). This third estimate marks an upward revision from the initial 3.0% and the second estimate of 3.3%. The growth was primarily driven by a decrease in imports and an increase in consumer spending.

In the first quarter of 2025, real GDP had decreased by 0.6%. The upturn in the second quarter reflects a downturn in imports and an acceleration in consumer spending, which were partly offset by a downturn in investment. Real final sales to private domestic purchasers increased by 2.9% in the second quarter, revised up from the previous estimate.

Consumer spending saw a significant upgrade, with growth reported at 2.5% annualized, up from the earlier estimate of 1.6%. This increase contributed 1.7 percentage points to the overall GDP growth. The revision was largely driven by stronger spending on services, which were revised 1.4 percentage points higher to 2.6%. Consumers are holding up, but headwinds from higher inflation and labor market softness are growing. Combined with elevated costs and heightened price sensitivity, this will likely constrain consumer demand in coming quarters.

Business investment growth saw another large upward revision to 7.3%, driven by even stronger spending on intellectual property products, which increased by 15% annualized. Software investment surged at an annualized rate of 198%, fueled by strong corporate demand for digital transformation and AI-related capabilities. Equipment investment grew robustly at 8.5% annualized, driven by an 11.7% surge in information processing equipment. In contrast, investment in structures declined by 7.5% annualized, marking its sixth consecutive quarterly drop.

Net international trade made its largest contribution to GDP growth on record, adding 4.8 percentage points to growth in the second quarter. This mainly stemmed from the unwinding of imports following a surge in the first quarter due to businesses stockpiling ahead of anticipated tariffs. Imports plunged 29.3%—the largest decline outside a recession since 1969—following the first-quarter surge. This was partially offset by the largest inventory decline on record outside of a recession, as businesses drew from their stocks to avoid paying prohibitive duties on their merchandise.

Despite the positive revision, the economy faces potential headwinds. Hiring has slowed sharply in 2025 compared to the post-pandemic boom of 2021–2023, with recent job creation averaging only 53,000 per month. This slowdown in hiring is cited as a key factor contributing to potential economic strain. Additionally, while inflation was on a disinflationary path before the tariff impact, the introduction of tariffs is expected to accelerate core Consumer Price Index (CPI) inflation toward 3.2% year-over-year by year-end.

The revised GDP data for the second quarter of 2025 underscores the resilience of the U.S. economy, driven by consumer spending and AI investments. However, potential headwinds such as trade policy uncertainties and a slowing labor market warrant close monitoring in the coming quarters.